Conditional Cash Transfers: Paying People to Invest in Children

Conditional cash transfer (CCT) programs stand out as an example of how to use resources effectively

By giving cash to women, CCTs can change household consumption patterns in a way that benefits children

While CCTs increase school attendance and the use of health services, they need to be complemented by improved public services

A strong social protection strategy should include other transfer programs like workfare or social pension

February 12, 2009—In a small village in the Philippines, Marciel Tuayon proudly shows off her children’s new schoolbags to visitors from the World Bank. With money coming in from a government cash transfer program, she is able, for the first time, to send all five of her young children to school.

“I am thankful for the money,” said this 34-year-old mother, who was happy to accept a number of conditions—including regular schooling for her children—in order to receive the cash. “I am now able to buy school supplies. ”

Maria Elena Saga, principal of the nearby Esperanza Elementary School where Marciel sends her children, has seen change come to the village with help from the program. “There was a big drop-out rate before because of child labor and children having to take care of other children,” she said, “Now there is a big increase in attendance.”

A new World Bank report, “Conditional Cash Transfers: Reducing Present and Future Poverty,” takes stock of programs that give poor families cash to keep children in school or take them to health clinics, noting that they work well to help reduce poverty and invest in tomorrow’s adults.

“We are increasing support to conditional cash transfer programs because they stand out as an example of how to use resources effectively—especially during this period of multiple crises and uncertain foreign aid,” said Justin Lin, World Bank chief economist.

Cash or Tortillas?

By providing steady cash, “CCT” programs shield poor families from the worst effects of unemployment, catastrophic illness, and other shocks to household income. There is less risk of children going hungry or being pulled out of school, while human capital is built for the future.

“We could instead transfer income to the poor by subsidizing tortillas, but that would just promote consumption of tortillas,” said Santiago Levy, Vice President, Inter-American Development Bank and main architect of Mexico’s Progresa/Oportunidades, a pioneering CCT program in Latin America. “If you are going to transfer income, do it in a smart way, so that one day poverty is reduced to the extent that you won’t have to do it anymore.”

Indeed, CCTs can be an efficient part of 21st-century social protection strategies, as governments try to replace less effective income transfers such as badly targeted, market-distorting subsidies.

The CCTs explosion

In 1997, three developing countries had CCT programs: Bangladesh, Brazil, and Mexico. Over the next decade, these programs spread across the world to cover over two dozen countries by 2008. There are now CCT programs on every continent, in both rich and poor countries, from Mexico’s Oportunidades to New York City’s Opportunity NYC.

CCTs have also grown tremendously within countries. Mexico’s Progresa began in 1997 with 300,000 households; its successor Oportunidades now reaches 5 million households.

“A part of the reason these programs are getting popular is support from institutions like the World Bank and the Inter-American Development Bank,” said Tina Rosenberg, a Pulitzer-winning writer for the New York Times, during a discussion at the World Bank. “But there’s also been an ideological shift in how people think about social welfare.”

Rosenberg, who has written extensively on Latin America, also noted that CCTs are relatively easy to do well, and that the basics of these programs are much easier to export to low-capacity countries than any other social program.

Breaking the poverty cycle

“The opportunity that CCTs offer—to break the poverty cycle from parents to children—is very compelling,” said Norbert Schady, co-author of the report and senior economist at the World Bank. “There’s solid evidence that CCTs boost consumption and reduce poverty.”

As might be expected, the effect on poverty reduction is greatest when the size of the cash transfer is generous. In Mexico, the poverty gap—or shortfall from the poverty line—among CCT beneficiaries in rural areas was reduced by 19 percent.

Household consumption patterns have changed among CCT beneficiary households, in part because cash transfers are made to women. The evidence shows that women spend more than men do on food, high-quality nutrition, and other things that benefit children.

CCTs have been so successful against poverty because they largely target poor households. Also, they have not, as some feared, led to adults reducing their work outputs in response to the steady income supplement.

“The old thinking was that if you gave poor people cash, they might spend it on alcohol,” commented Levy, “But if you treat people from poor households like adults, they behave like adults, and I think that’s good news.”

More children in school

CCTs have clearly increased the use of education services in country after country. In Pakistan, for instance, a CCT program increased the school enrollment of 10-14 year-old girls by 11 percentage points. And in Mexico, the Oportunidades program decreased dropout rates between the 6th and 7th grade by 9 percentage points.

“I've met kids from the poorest families in Mexico who have finished secondary school and are aspiring to go to university,” said Axel van Trotsenberg, World Bank country director for Colombia and Mexico. “That you didn't see 20 years ago—but now, it’s a real possibility.”

In Latin America, CCTs have also increased the use of preventive health services. In Honduras, a CCT program increased the proportion of children who had at least one preventive health visit by 20 percentage points.

Are CCTs a silver bullet?

The new World Bank report on CCTs cautions that they are not a panacea for all ills. In fact, these programs need plenty of complementary services and support.

“The use of services doesn't automatically translate into improved outcomes,” said Ariel Fiszbein, co-author of the report and Chief Economist for Human Development at the World Bank. “We find that when children go to school more, it doesn't necessarily mean they are learning more.”

To actually reduce child mortality or improve learning, CCTs need to be complemented by higher-quality education and health services and a strong focus on giving children a head start, such as via better nutrition or preschool programs.

Fiszbein noted that CCTs need to be complemented by actions to improve the coverage and quality of public services. He saw this as “the other side of the CCT coin,” where service providers like nurses and teachers are given incentives to influence their behavior.

Notably, CCTs are not the only means of social protection. They are intended to support poor households with children, and should be supplemented by other transfer programs such as social pensions or workfare to reach all vulnerable groups.

A focus on results

One of the important features of CCT programs is that many have advanced monitoring components that allow an objective evaluation of their results. For example, Colombia’s Familias en Acción systematically monitors the program’s impact on its beneficiaries.

“We have been strongly supporting the Colombia program financially, with a big loan approved in December 2008,” said Trotsenberg, “But most importantly, we are involved in the program’s design, monitoring and evaluation; this helps the program work better.”